What happens to Ireland if Greece defaults
September 21, 2011 2 Comments
This piece first appeared in the Guardian on September 21st and has been reposted here with the Guardian’s permission.
Greece is hanging by a thread and Ireland is getting increasingly nervous about the implications for its own future.
The whole point of austerity measures in Greece was to reduce the primary deficit. With retrenchment choking off any hope of economic growth, the opposite has occurred.
There is now a real chance that Greece will be denied the €8bn tranche of the previously agreed €110bn bailout programme, in which case default would be inevitable and it would most likely abandon the euro.
If this happens, what are the implications for Ireland?
Both the troika and Ireland have a part to play in determining whether the country follows suit or not. However, as long as EU leaders remain committed to the euro project, Ireland should stay the course and continue to implement the terms of the bailout programme.
Worst case: Ireland could be pushed out of the euro
If Greece defaults, there will be an immediate effect on Ireland’s borrowing costs.
Under the bailout programme, Ireland is due to borrow €4.5bn in the markets next year and €14.2bn in 2013 to help meet its funding needs. If Greece exits the euro, the markets will fear Ireland would be next and price that in, causing bond yields to sky-rocket even beyond the currently unsustainable levels.
This would mean Ireland would be unable to raise the requisite funding over the next two years in the markets. Without more funding from the EU/IMF, it would default. Assuming Ireland continues to implement the terms of the bailout programme, it seems likely the troika would step in to provide Ireland with a second bailout programme, something they have already indicated they were prepared to do.
However, a disorderly Greek default is likely to chip away at the political commitment to the euro that still exists among EU leaders. If this is the case, there is a very small risk that EU leaders – faced with angry electorates sick of bailouts and austerity – could choose to hang Ireland out to dry and allow the eurozone to unravel.
Ireland could chose to default
Assuming EU leaders remain committed to the euro project and provide Ireland with more funding, a Greek default and eurozone exit would leave Ireland with a stark choice. Ireland would not have to default, but it could choose to.
Some analysts claim that a Greek exit from the eurozone would offer an opportunity for Ireland to abandon the euro as well. Rather than continue with several more years of austerity and pain, the argument goes, Ireland should just print punts, default, clear the deck and return to growth.
This would be an extremely messy solution. Ireland is currently running a primary deficit. This means that excluding debt servicing costs, it still needs to borrow money just to run the government and pay social welfare and public sector salaries.
Ireland would find itself cut off from EU/IMF funding and frozen out of the markets at a time when it would need money immediately. This hardly seems like something the government should choose.
A leader would only decide to accept such costs in extremis, with the most likely spur being domestic social unrest. This is extremely unlikely in Ireland. Unlike in Greece, where protesters regularly descend on Syntagma Square in central Athens, the Irish public is largely resigned to the terms of the bailout programme.
Ireland likely to stay the course even if Greece defaults
The lack of social unrest is not the only way in which the Irish case differs significantly from that of Greece. While the bailout programme clearly is not working in Greece, it is in Ireland.
According to the European Commission’s Summer 2011 Review of the Irish bailout programme, Ireland is on track to meet and even exceed some of its targets. The European Commission now forecasts that Ireland’s budget deficit will be reduced to 10.2% of GDP in 2011, below the bailout programme target of 10.6%.
Beyond fiscal consolidation, Ireland’s current account has swung into surplus, and there are indications that the country has gained competitiveness since 2008. In the second quarter of 2011, hourly unit labour costs fell by 3.6% in Ireland, compared with 3.5% in Greece and 0.8% in Portugal (they rose by an average 3.6% across the eurozone).
The bailout programme has not been painless for Ireland, nor will it be in the near future with yet another austerity budget if being tabled this December with €3.6bn due to be raised through spending cuts and taxes.
But the pain caused by retrenchment and structural reform is yielding results in Ireland without the shock therapy that would be involved in a eurozone exit.
Assuming that EU leaders remain committed to the euro and are willing to support Ireland if the markets shun it, the immediate course of action for the Irish government in the event of a Greek default or euro exit is clear.
As long as Ireland is running a primary deficit, it should continue implementing the terms of the bailout. Ireland will probably not generate a primary surplus until 2013. Given unprecedented volatility in the eurozone, it is impossible to know where we will be in the euro crisis by then.